Financial emergencies don’t ask for permission. The geyser bursts in the middle of winter, your car decides to stop working right before a big trip, or worse, a sudden medical expense shows up. Most people rush for money during those times. Additionally, if you have been investing in mutual funds, your first instinct is frequently to “redeem some units.”
Sounds logical, right? You need money, so you sell what you own. But here’s the thing: redeeming your funds at the wrong time can mess up your long-term plans. Imagine selling when the market dips. You not only lock in a loss but also miss the chance to benefit from a recovery. Add capital gains tax on top, and suddenly the quick fix looks very expensive.
That’s why more investors are waking up to a smarter alternative, taking a loan against mutual funds.
Why Redeeming Mutual Funds is Not a Good Idea?
Let’s be honest, selling mutual funds feels easy. One click, money in your bank. But easy isn’t always right. Here’s what usually happens: A friend of mine sold equity funds worth ₹5 lakh during the market correction of 2020 to cover personal expenses. Within a year, the same funds had grown nearly 40%. If he had just borrowed against them, he would have repaid his loan and still pocketed that massive growth.
Instead, he lost twice first, by missing out on the gains, and second, by paying capital gains tax when he redeemed. This is why financial planners often warn against breaking investments unless you absolutely must. Your money in mutual funds is meant to grow, not get chopped up every time life throws a curveball.
The Smarter Play: Loan Against Mutual Funds
So what exactly is a loan against mutual funds (LAMF)? In simple words, you pledge your mutual fund units to a bank or NBFC (Non-Banking Financial Company), and in return, they give you a loan. Similar to how a loan against securities works.
The best part? Your funds don’t stop working for you. They remain invested in the market while you use the loan for whatever urgent need you have. It could be a medical bill, your child’s school or college fees, or even just bridging a short-term cash crunch.
Unlike personal loans or credit cards, the interest rates here are much lower, often in the range of 9 to 12 percent. And since it’s a secured loan, lenders are more relaxed with documentation. Many now offer fully digital processes; just log in and pledge your funds, and the loan is disbursed quickly.
Why It Makes Sense for Investors?
Let’s put numbers to this. Suppose you have ₹8 lakh invested in mutual funds. You need ₹3 lakh for an emergency. Instead of redeeming, you pledge your portfolio. The lender approves 50% of your holdings’ value as a loan, which covers your needs comfortably.
Now here’s the magic: your ₹8 lakh stays in the market. If the market grows at, say, 10% that year, your investments could become ₹8.8 lakh. Even after paying the interest on your loan, you come out ahead compared to redeeming. Plus, you avoid capital gains tax because you never sold.
Things to Keep in Mind
Now, I don’t want to paint this as a fairy tale. A loan against mutual funds is smart, but it’s not a free pass.
- It’s still a loan. You’ll need to repay it, and interest does add up if you delay.
- Market risk remains. If your portfolio value falls sharply, the lender may ask you to top up your collateral or repay part of the loan (this is called a margin call).
- Limited borrowing. Lenders don’t give you the full value of your investment. Typically 50 percent. So you won’t be able to pull out the entire amount.
- Short-term use only. This works best for temporary liquidity needs, not for funding lifestyle expenses you can’t afford.
Real-Life Example
Think like this: Ramesh has been investing diligently for five years. He’s got ₹12 lakh across different mutual funds. Suddenly, he needs ₹4 lakh for his father’s medical treatment.
Option A: He redeems funds. That triggers taxes, and he misses out on future gains.
Option B: He pledges and takes a loan against his mutual funds. The money is available in a day or two, interest is manageable, and his ₹12 lakh keeps compounding quietly.
Which option do you think he’d feel better about a year later?
Why More People Are Choosing This?
The growing popularity of loans against mutual funds isn’t surprising. It’s flexible, it’s quick, and it doesn’t disrupt your investment journey. For disciplined investors, it’s almost like having a financial safety net without dismantling the house you’ve built.
Think about it: credit cards charge you 30 to 40 percent annually if you roll over balances. Personal loans range between 12 and 18 percent. Compared to that, a secured loan at around 9 to 12 percent feels like a bargain.
It’s not just for emergencies either. Some people use it for short-term opportunities, like grabbing a property deal or covering a business cash flow gap. As long as you have a clear plan to repay, it works well.
Conclusion
Your mutual funds are more than just investments sitting in your Demat account. They can also be a financial backup when life surprises you. A loan against mutual funds helps you meet urgent needs without derailing your long-term wealth creation. But remember, it’s still debt.
Use it wisely, repay on time, and don’t fall into the trap of thinking it’s free money. Treat it like a short-term bridge, not a permanent solution. If you’re disciplined, it’s one of the smartest financial tools you can keep in your back pocket: liquidity when you need it, growth when you don’t.
